There is a report today from Standard Bank’s commodities analyst Melinda Moore that iron ore miner Fortescue Metals Group is considering closing its Cloudbreak operation in Western Australia.
In the bank’s commodities note Moore said:
“FMG is rumoured to be (FINALLY) considering reducing its output back to 120 million tonnes from as high as 180mt annualised in some shipment months this year, primarily by closing its higher cost Cloudbreak (40mtpa) mine, focusing on margins rather than volumes – as all miners should now be doing!
“This could reduce the miner’s breakeven price on a China CFR basis from $71/t to below $65/t (savings on costs/moisture) and also assist in significantly reducing market supplies.”
Fortescue has denied the rumour using Twitter to comment.
.@GregWRoss Fortescue is not closing Cloudbreak. This report is based on speculation from an analyst with no connection to Fortescue.
— Fortescue Metals (@FortescueNews) November 27, 2014
Cloudbreak was Fortescue’s first mine and is part of the company’s Chichester Hub in the Pilbara region of Western Australia. First ore was shipped from the operation in May 2008 and it currently processes 40 million tonnes a year.
The iron ore price this year has fallen from above $100 a tonne to $68.41 a tonne. The drop is squeezing the margins of all producers – especially the higher cost miners like Fortescue, Atlas Iron and BC Iron.
During the mining investment boom iron ore tonnes increased as companies brought on new supply to take advantage of Chinese demand.
“The four majors alone have contributed 164mt in additional supplies over the past year,” Moore said. “We can also count an additional 25-30mt from the ‘little league’.”
Market forces will eventually weed out higher cost producers and excess supply will right itself as operations scale back tonnes or shut. Fortescue remains exposed to iron ore price fluctuations because of its pure-play status – it’s shares are down about 50% for the year to $2.86 a piece.
“Effectively the market remains oversupplied still by 200mt right now, explaining the current ‘free-fall’,” Moore said.
In another sign that iron ore miners are gearing up to deal with lower commodity prices, Rio Tinto, which is one of the lower cost producers, today deferred making a $1 billion investment decision on its new Silvergrass iron ore mine until the third quarter of 2015 at the earliest.
However, Rio said it will continue to boost production to 330 million tonnes in 2015 and 350 million tonnes by 2017. Additional tonnes will come from existing operations and productivity increases.
There’s more here.